Tag: investment

Is Facebook worth $50 billon?

Investment bubble or a wise bet?

Goldman Sachs’ recent $500 million investment in Facebook that values the entire business at fifty billion dollars raises the question, can a business that was founded in college dormitory seven years ago really be worth that sort of money?

It is possible Facebook is worth that sort of money, but to figure out if it really is, we have to crunch some numbers. So here is a back of an envelope calculation.

Learning from others

The first thing we need to look at is similar examples, the closest comparison is Google who were launched on the stockmarket shortly after Facebook were founded and today have a market worth of $195  billion.

So Facebook’s investors are valuing the business at about ¼ of Google’s size. Yahoo’s stock analysis of Google allows us to look at the rough numbers.

Income

Currently, Google is earning 29.3 Billion and making a profit of 8.5billion for a Price to Equity (P/E) of 23.26.

To justify a 50 billion dollar valuation on similar rations, Facebook would have to make around 2 billions dollars profit on revenues of $8 billion .

Facebook is reported to have made $1.2 billion in sales with $355 millon profit in the first nine months of 2010. If we extrapolate that, crudely assuming no revenue growth in the last 3 months, we come to 2020 earnings of $1.6 billion and roughly $450 million profit.

So Facebook has to grow revenues and profit by a factor of five, based on the same ratios as Google, to achieve the $50bn valuation. Where could this come from?

Advertising revenue

The bulk of Facebook’s current revenue comes from advertising, according to Inside Facebook in 2009 all but $10million of their $660 million earnings came from one form of advertising or another.

Online advertising is going to continue to grow spectacularly, a 2010 Morgan Stanley research paper illustrated (on slide 25 of the previous link) how advertisers will have to increase spending onling by $50 billion to match the Internet’s share of media consumption.

It’s a fair assumption that Facebook, as the biggest social medial platform, will get a large slice of that $50 billion. If Facebook were to capture 10% of the market’s growth, they’d achieve their valuation easily.

We should also consider that most of Facebook’s revenue is coming from the United States and they barely touched international markets, so there’s even more potential growth in their advertising revenue.

Games revenue

One of Facebook’s biggest growth opportunities comes from the games. Games like Farmville and Mafia Wars are proving popular with the user base; Zynga, the developer of Farmville, itself has a projected market capitalisation of $5.8 billion.

The global games business is valued at $105 billion dollars and much of this market is moving to web based, online platforms. Should Facebook based games grab 10% of that market, the platform’s 30% cut would see another 3 billion go into Facebook’s revenue, most of which would be profit.

The credits market

Related to the games market is the sale of credits for purchases of games and other features like virtual, and real, gifts and products.

It’s almost impossible to quantify what that market would be but already credits have gone on sale in US stores like WalMart and Best Buy and the virtual world site Habbo Hotel reports 2010 credit revenues of 4.5 million Euros on a user base that is a fraction of Facebook’s size.

So is Facebook worth $50 Billion?

Facebook’s fifty billion dollar valuation is feasible. That’s not to say there aren’t risks, it’s possible Facebook could turn out to be another fad like Myspace or that users might decide to value their privacy over Facebook’s benefits.

While it’s not an investment you’d like to see your grandmother in as a safe source of retirement income, for risk tolerant Russian fund managers and high income clients of Goldman Sachs, it’s a punt worth taking.

Big, hairy broadband goals

fibre_opticThis column first appeared in SmartCompany. Since writing it, I’ve also done an ABC spot on the National Broadband rollout.

The more I research and reflect on the proposal, the more I’m convinced this plan is a winner – assuming it goes ahead.

I’m also more convinced than ever that Telstra is the big winner from the proposal as it relieves them of the Universal Service Obiligation and means they can avoid the massive costs of maintaining and upgrading the copper network. Not to mention the likelihood that the government will end up leasing space on Telstra’s existing fibre network.

Jim Collins in his book “Good to Great” coined the phrase BHAG, or Big Hairy Audacious Goal. Few goals are bigger or more audacious than spending $43 billion to run fibre to every house, office, school, farm and factory in Australia.

My first reaction to the national broadband plan was disappointment – on Twitter I commented “there goes the Rudd Government’s final strand of tech credibility.”

Having had time to think about the plan, it’s clear I was wrong. The announcement is a huge change in policy and it will have immense ramifications on how we do business.

Fibre-to-the-premises completes the gaps in our communications systems. When the rollout is complete, we can rely on our internet links and assume our customers and employees have the same dependable connections.

For regional enterprises this is great news, as it will bring the world to the door to some of Australia’s best industries and businesses. It levels the playing field between big and small businesses, regardless of their location.

For Telstra, the result is mixed. While it means more competition in regional areas, it also means it can save billions on upgrading the aging copper network. The criticism of the rollout’s cost ignores the massive replacement cost already required to replace the old phone lines.

While perhaps not good news for management, the proposed break up of Telstra is good for shareholders. Sensis and BigPond, for example, would be worth far more when not shackled to a company fixated on maximising revenue from a ramshackle copper network.

Another great change is in Canberra’s communications policy. Australia has suffered from communications and media being tied together, with the interests of well connected commercial groups being more important than good planning.

The Keating government’s disastrous cable TV rollout was an attempt to provide modern infrastructure while appeasing the dominant media tycoons who saw technology as a threat to their empires.

As a result we got a mess and the cable TV networks, which could have provided this infrastructure 15 years ago became a political and financial quagmire, which delivered little of what was promised.

We shouldn’t understate the social benefits of the plan either. As the recession bites, the need for skilled and unskilled labour to build the rollout will assist in keeping unemployment down.

It’s certainly billions of dollars better spent than propping up shopping centre developers, banks or the manufacturers of cars that no-one wants.

The biggest change though is ideology. Until now, it’s been difficult to imagine a government proposing a massive infrastructure project without the ticket clippers of the merchant banks and other cronies skimming a fat share.

In every respect, this is the best communications plan and one of the most visionary ideas we’ve seen out of Canberra in generations. While it’s going to cost, history will show it’s money well spent.

Whether the broadband rollout becomes reality or not, fast, reliable communications are already a business necessity and will become even more so.

Think about what fast broadband means for your business and plan how you can take advantage of it. Those who don’t grasp the opportunities are going to be left behind.

So have a think about it. You might come up with some BHAGs of your own.

The broadband explosion

For a typical exciting Sunday afternoon, I’ve been trolling through the Telstra annual report.

One statistic that leaps out at me is the growth in consumer broadband subscribers of nearly 60%, even if we assume all the 373,000 customers who ditched their dial up plans went over to broadband, that’s still a whopping 35% growth in customers.

According to the Australian Bureau of Statistics, the nine month growth in consumer broadband connections from June 2006 to March 2007 (not quite the same period) was 46%.

The decline in dial up connection was 26% over the nine months, as opposed to Telstra’s decline of 36.3% over the twelve months.

Interestingly, Telstra’s dial up decline would have been greater if their systems allow customers to transfer their existing dial up email address to broadband. As it stands, they have to retain their dial up account and we steer customers to Bigpond’s Casual User Plan as a cheap way of doing this.

So Telstra’s performance isn’t out of the line with the industry. What it does show is the massive take up of broadband. It’s also profitable, as Telstra’s report also shows their income has grown by over 66%.

Over the next few weeks I’ll have a look at how other providers are doing. It will be interesting to see how others are performing.